Reed Smith Client Alerts

In Alexandria Venture Investments, LLC v. Verseau Therapeutics, Inc., 2020 WL 7422068 (Del. Ch. Dec. 18, 2020), the Delaware Court of Chancery – following precedent set in a recent Delaware Supreme Court decision – held that when the purpose of a Section 220 books-and-records demand is to investigate potential mismanagement, the stockholder demand does not need to demonstrate that the alleged wrongdoing is “actionable.”

Authors: Brian M. Rostocki Benjamin P. Chapple Alexandria P. Murphy

Section 220 of the Delaware General Corporation Law

A stockholder of a Delaware corporation may inspect the corporation’s books and records for any “proper purpose,” which is a purpose reasonably related to such person’s interest as a stockholder.  Delaware courts have consistently held that investigation of alleged corporate wrongdoing falls within the ambit of Section 220 of the Delaware General Corporation Law (Section 220) because it is reasonably related to a stockholder’s interests as a stockholder.  However, Delaware courts must balance a stockholder’s right to corporate information with the corporation’s right to avoid baseless interference with the corporate directors’ discretion to manage the business affairs of the corporation.  Therefore, bare allegations of possible waste, mismanagement, or breach of fiduciary duty, without more, will not entitle a stockholder to a Section 220 inspection.   

A stockholder who can establish by a preponderance of the evidence a “credible basis” from which a court may infer that corporate wrongdoing or mismanagement occurred will, in most instances, be entitled to obtain corporate records under Section 220.  Indeed, Delaware courts have a long history of encouraging stockholders who suspect wrongdoing to use the “tools at hand” to investigate such concerns, such as serving a Section 220 demand on a corporation before filing a derivative suit.  As noted in Alexandria, this standard is “the lowest possible burden of proof,” and it is far below the burden of proof necessary to show that any actionable wrongdoing actually occurred. 

The court’s decision in Alexandria

In Alexandria, the plaintiffs sought to compel inspection of books and records of Verseau Therapeutics, Inc. (Verseau), pursuant to Section 220.  The plaintiffs sought to investigate, among other things, whether Verseau’s directors violated their fiduciary duties when they rejected a financing proposal made by the plaintiffs, instead favoring the interests of certain directors and affiliates.  

Verseau rejected the stockholders’ books-and-records demand, arguing in part that the stockholders did not have a credible basis to suspect wrongdoing because a majority of independent and disinterested Verseau directors had made all relevant decisions.  

The Delaware Court of Chancery rejected Verseau’s argument and granted the plaintiff inspection of certain of Verseau’s corporate records.  In its decision, the court followed a recent Delaware Supreme Court holding, which explained that a Delaware court should “defer the consideration of defenses that do not directly bear on the stockholder’s inspection rights, but only on the likelihood that the stockholder might prevail in another action.”  In other words, a stockholder seeking a Section 220 inspection is not required to establish that the alleged mismanagement or wrongdoing is actionable, so long as the stockholder establishes a credible basis from which the court can infer possible mismanagement or wrongdoing, such as a conflicted transaction.